Credit rating refers to the evaluation of a prospective debtor’s credit risk, to establish the likelihood of them successfully repaying the debt and avoiding defaulting.
It can be a confusing topic, but it is very important for your future, so ensure you read through our guide to bring yourself up to speed with credit ratings.
’Universal credit ratings’ do not exist
You may have heard of universal credit ratings and blacklists, but the truth is that neither of these exist.
Every lender scores you on different criteria, so rejection from one lender does not necessarily mean all lenders will. As well as using your credit file, they will also look at information provided during the application and any dealings that you have had with them in the past, before making a decision.
Should you be rejected, you should check over your credit file for errors before applying again.
If you have a poor credit history it may feel as though you’ve been blacklisted, but credit scoring is usually based on logic; would you lend to someone that had a history of not repaying loans?
There are a number of lenders that exist primarily to lend to those who struggle to find finance, but these usually come with the caveat of a huge interest rate.
Lenders score you based on predicted future behaviour
Perhaps surprisingly, it can be difficult to get credit if you have little-to-no credit history, even if you have never defaulted.
If you have no credit history then it makes you appear risky and unpredictable, because they have no knowledge of your likelihood to repay loans.
That’s why it is important that you build up a credit history, but this can be difficult if no-one is willing to loan to you.
Lenders consider how likely you are to make them money
One of the primary misunderstandings of credit checks and banks rejecting applications is that they only reject those who are likely to default on repayments.
Obviously, those who are likely to miss their repayments or not pay altogether are seen as undesirable by most companies. However, in actual fact lenders are often checking to see if an applicant would be profitable for their business.
You may feel that you’re the perfect borrower, but for credit card providers the ideal customer is someone that is constantly in debt to them, never quite defaulting and just about meeting the minimum repayments.
It is also possible that you are judged on your likelihood to buy lenders’ products in the future, with banks scoring you based on products they’d like to sell you in the future. For example, when you apply for a savings account, you could be judged to see if you’re likely to be a profitable mortgage borrower in the future.
What information do lenders have?
Lenders don’t just use your credit file to assess you; they use a number of other pieces of information to build up a picture of you as a person.
The application form
This is one of the most important pieces of information used by lenders. It tells them your salary, family size and the reason you’re looking for a loan.
Ensure that you fill out the application carefully, as any errors can lead to problems or even rejection. Maintain consistency throughout the application, as inconsistencies can lead to problems down the line due to fraud checks.
Companies will usually use any information they have on your previous dealings with them. This can be a good thing, because people with a limited credit history are usually more likely to be granted a loan by their own bank.
Equifax, Experian, and Callcredit credit reference agency files
Lenders tend to use one of these agencies, whose business is compiling information, when assessing a borrower. This data comes from four primary sources:
Electoral roll information
This is publicly available and contains address and residence details.
County court judgements (CCJs), decrees, IVAs, bankruptcies and other court debt orders indicate if you have a history of debt problems.
Search, address and linked data
This includes records of other lenders that have searched your file when you’ve applied for credit, addresses you’re linked to, or other people you have a financial association with.
The big gas and electricity firms do hard credit checks – these go on your file too.
Lenders use credit reference agencies to share details of any accounts that you hold, including credit cards, bank accounts, loans, mortgages and mobile phone contracts.
Each month, around 350 million records are tracked. The most common kind of information is ‘default data’ which shows where you’re officially in default.
Many lenders also share ‘full data’ which can contain the way in which you operate the account and how much you repay on average.
Payday loan data is becoming reported far more often, and doorstep lenders are obligated to share the data they hold.
What lenders don’t know about you
There is a misconception that every aspect of a borrower’s life is accessible through their credit files, but in reality they contain only financial data.
Some of the things that people incorrectly think is listed in their credit file include:
- ‘Soft searches’ (you see this, but lenders do not)
- Student loans (except pre-1998 starters)
- Council tax arrears
- Parking or driving fines
- Who you’re married to or living with
- Declined applications
- Some defaults or missed payments
- PPI, CPP, bank charges and other reclaims
- Whether you’ve checked your credit file (you see this, lenders don’t)
- Race, religion, ethnicity
- Savings accounts
- Medical history
- Criminal record
- Child Support Agency payments
Your credit record informs your interest rate
Over the last decade or so there has been a real shift towards ‘rate for risk’, meaning that credit providers tend to use your credit file to decide the rate of interest offered on your loan.
You can be rejected for fraud
When you apply for a financial product, it isn’t just you being assessed; it’s also the legitimacy of the application.
If you have ever committed fraud, or someone has done so under your identity, this information will be available in your file.
As well as using credit reference agencies, lenders also use anti-fraud agencies in order to ensure there are no problems. The two most prominent of these are:
This little-known system is prone to errors, but is used by the vast majority of lenders and receives 100,000 applications each day.
This is a record of known fraud and if you’re on there, you should already know about it.
Also, if you ever think you’ve been the victim of identity theft then you should contact this organisation.
Companies will try to get you to pay for a credit score, but this arbitrary figure is unimportant. It’s actually your credit file that matters.
Credit reference companies traditionally made their money by selling data to lenders, before realising that they could generate business in the form of consumer credit management.
Essentially this enabled them to start trying to sell products to you, including credit scores. As discussed, however, each lender will score you differently, so this number is essentially meaningless.